This Question Deals with Summary Financial Performance Indicators for Investment

question 111

Essay

This question deals with summary financial performance indicators for investment centers.
Required:
1. Discuss the similarities among ROI, residual income (RI), and EVA®.
2. In what sense is EVA® similar to and in what sense is it distinct from residual income (RI)?
3. Present the equation for calculating EVA® and provide a brief discussion of the elements that go into the calculation of EVA®.
4. What are the two approaches that can be used to estimate the two major components of EVA®? Which of these two approaches is superior?

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Definitions:

Excess Depreciation

The depreciation claimed on an asset that exceeds the amount that reflects its actual decrease in value, often due to accelerated depreciation methods.

Consolidation Purposes

The objective of amalgamating financial statements from various entities within a single corporate group to present a unified financial position and results of operations.

Eliminate Unrecognized

A process in accounting, often related to consolidation, where unrealized profits, losses, or transactions within or among entities are removed from financial statements.

Intra-entity Gross Profit

The profit recognized on transactions conducted within the same entity, which may need to be eliminated in consolidated reporting.